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UBC Theses and Dissertations

Trading panics and information acquisition : theory and experiments Kendall, Chad William


This dissertation studies the incentives of economic agents to acquire information about financial assets when it must be acquired through time consuming research. When information can not be obtained instantaneously, agents face a tradeoff between acting immediately and performing more thorough research. Better information allows for more informed trading decisions, but research is costly because other agents' trades move prices adversely as time passes. The first chapter develops a theoretical model in which agents sequentially trade a single financial asset. Each agent receives weak, private information when they arrive to the market and may trade immediately, or instead wait for additional information. Should they wait, other agents have an opportunity to trade before the first agent receives their additional information, which creates an endogenous cost to waiting. The analysis determines the conditions under which equilibrium behavior involves immediate trades ("panics"), and then studies the quantitative impacts of weakly informed trades on the ability of prices to aggregate information. The second chapter experimentally tests the theoretical model in a laboratory setting, in order to determine whether or not subjects understand the tradeoff between better quality information and potential adverse price movements. Comparative static results establish that the theory broadly explains when panics, and the corresponding informational losses, occur. However, additional, "heuristic" panics are also frequently observed. Specifically, subjects exhibit a strong tendency to wait for more information when highly uncertain about asset values, but switch to trading as soon as possible once values become more certain. Motivated by the findings of the second chapter, the third chapter extends both the theory of the first chapter and the experimental results of the second chapter to a second, richer environment. Different from the sequential structure of the first model, agents may trade simultaneously in the richer model. Experimental results with the richer model produce trade clustering and serial correlations in returns, as predicted by the heuristic behavior identified in the second chapter. These phenomena are well-established features of real financial markets, suggesting that the heuristic subjects follow in the laboratory may provide a novel explanation for these phenomena.

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